Russian gas in Europe: new highs and political intrigues

Gas exports by Gazprom to Europe and Turkey in 2017 were again successful. The Russian gas giant can definitely use these positive results for propaganda purposes. Yet, challenges are growing, and a new high is unlikely to be recorded. Besides, there will be fierce struggle for implementation of the Nord Stream-2 project.

According to the data Gazprom posted in January 2018, last year the company supplied 193.9 bcm of natural gas to countries outside the CIS. It was 14.6 bcm (8.1%) higher than the previous maximum reached in 2016. In 2016 Gazprom increased gas exports to countries outside the CIS by 12% to 179 bcm compared to 2015. Gazprom achieved two absolute highs for two years in a row, which is impressive on the background of permanent anti-Gazprom propaganda in the West and among some Russian experts claiming that Europe does not need gas of Gazprom. According to our calculations, some 170 bcm of Russian gas was delivered to the European Union in 2017, which was 16 bcm more than in 2016. Reverse supplies from Europe to Ukraine rose just by 3.1 bcm. Therefore, net exports of Russian gas to the EU advanced by approximately 13 bcm. Increase was almost equally distributed between Northwestern Europe (deliveries through Germany) and Southeastern Europe (transit via Ukraine).

Competitors of Gazprom also demonstrated good results in Europe. Norway added 7.6 bcm (6.8%). LNG imports went up by almost 7 bcm (14%). Though, only piped gas supplies from Northern Africa failed to reach the 2016 level. The reasons are understandable – cheap gas encourages its consumption in Europe, while declining domestic output seriously increases imports that reached a new absolute high of 382.6 bcm last year.

Very important story for European market in 2017 was Explosion at Baumgarten gas hub. The accident may make stakeholders think about effectiveness of the European gas strategy that stipulates active development of exchange trade, gas hubs and the spot market, as well as focuses on creation of alternative gas receiving capacities. Interruptions of Russian gas supplies to some European countries caused by the explosion in Baumgarten provided a wonderful opportunity to prove effectiveness of the new arrangement. However, the result is absolutely opposite. The exchange trade option did not work – it turned out there was no extra gas at hubs during this unexpectedly emerged peak demand. During abnormally cold weather European consumers usually address Gazprom for additional gas quantities. It is the advantage of long-term contracts – such a supplier guarantees to cover seasonal peaks. There is no such guarantor on the spot market; therefore, there is nothing to cover the unexpected demand with.

It is remarkable that the crisis occurred in Italy – the most diversified country in Europe. In addition to Russian and Norwegian gas, Italy can receive the fuel from Northern Africa, and it also has several LNG terminals. However, neither liquefied natural gas nor piped gas supplies from Northern Africa helped Italy on the day of the Baumgarten blast, while spot prices jumped very significantly.

Therefore, the situation in Italy leads to the conclusion: diversification of suppliers is not a guarantee of gas availability, let alone lower gas prices, and the new European gas market arrangement has evident weaknesses. Spot pricing becomes a potential pitfall, if there is insufficient supply of gas. Any technical accident that results in decline in physical amounts of the fuel on the exchange sends prices sharply upwards. And no additional gas quantities appear at hubs.

A remarkable event happened in 2017. After several years’ lull caused by political pressure from Brussels on the system of long-term contracts in general and on the position of Russia as the largest supplier, a new 10-year contract was signed with the Croatian company Prvo Plinarsko Drustvo for supplying 1 billion cubic metres of gas. The agreement was reached as an extension of a short-term contract signed in late 2016 for supplying 1.5 billion cubic metres over nine months to Croatia. This means that the Croatian company decided to have a long-term contract for approximately half of its annual gas import requirements, which is also connected with a decline in the internal gas production in the country that went down by approximately 1 billion cubic metres from 2010 to 2016.

The situation on the Italian market would be easier, if the Southern Corridor project had been implemented and the ITGI gas pipeline through Greece had been laid. This is why at present Russia is ready to supply gas through the Black Sea – resources and the required infrastructure are already in place in Russia.

The accident at the Baumgarten gas hub in Austria gave an additional impetus to a very acute struggle for and against bypassing gas pipelines leading to Europe, and correspondingly the struggle of some Western elites for preservation of natural gas transit via Ukraine.

From the very beginning, the project to build an additional run of the Nord Stream gas pipeline caused active resistance on the part of the US, the European Commission, and a number of European Union countries, Poland and Lithuania taking the most irreconcilable position among them. The project participants – Gazprom and five major European companies (Anglo-Dutch Shell, Engie of France, OMV of Austria, and Germany’s Uniper and Wintershall) – in 2016 were not able to circumvent the barriers put up by the government of Poland that made it clear that it did not intend, for political.